Budget ax falls on New York

NEW YORK (CNNMoney.com) -- New York's governor unveiled a painful budget plan Tuesday that slashes services, raises fees and takes some unusual steps to close a yawning $7.4 billion fiscal gap.

In his fiscal 2011 budget, Gov. David Paterson proposes cutting billions from school aid and state agencies, as well as closing four prisons, legalizing ultimate fighting and increasing taxes and fees by $1 billion.

Among the suggested tax measures: $1 more for cigarettes and a penny per ounce for sugary drinks. Also, ultimate fighting could finally come to the Empire State -- and bring with it an estimated $2.1 million in tax revenue.

"We can no longer afford the spending addiction we've had for so long," Paterson said. "Nobody wants to make these cuts. They will be difficult. They will be painful. They will affect the lives of our citizens. But they are necessary."

The state legislature will likely make changes to the $134 billion budget before it adopts the spending plan in coming months.

The state's woes are a bellwether of what others around the nation are facing. New York's fiscal year starts in April, the earliest of any state.

In the wake of the steepest drop in tax collections in nearly half a century, governors and legislators are wrestling with slashing services and hiking taxes.

Most states have until the end of June to come up with a balanced spending plan since, unlike the federal government, states can't run deficits.

New York's deficit is the fourth largest nationwide, in terms of dollars, according to the Center on Budget and Policy Priorities.

California, the state in the most peril, must contend with a $14.4 billion gap, while Illinois faces a $12.8 billion deficit and New Jersey an $8 billion hole.

In coming months, states will present budgets that will strive to balance spending cuts and tax increases, Nick Johnson, director of the center's state fiscal project. States are in even more dire shape since they have less federal stimulus money available to help plug the holes.

"For most states, 2011 is shaping up to be the worst budget year ever," Johnson said.

While New York did not propose any broad-based tax increases, other states might, he said. Paterson hiked takes last year, which gave him less room to maneuver this year.

Paying more for smokes and soda

New Yorkers would be shelling out more for their cigarettes and sugary drinks under the budget proposal. The governor is recommending a $1 per pack increase in the cigarette tax, which would raise $218 million, and a penny per ounce levy on soda, which would bring in $465 million. Paterson proposed a sugary beverage tax last year but lawmakers did not approve it.

The governor also wants to raise revenue by legalizing mixed martial arts, a more brutal form of fighting that's legal in dozens of states, including New Jersey. Previous efforts to allow ultimate fighting have died in committee in Albany.

State residents would also be allowed to buy wine in grocery stores and gamble at video lottery terminals more hours of the day, but would have to be careful of additional speed enforcement cameras that would be deployed.

In addition to cutting school aid, the governor would reduce state aid to the state and city university systems, as well as reduce the Tuition Assistance Program awards by $75 per student.

Funding for the Environmental Protection Fund would be slashed by $79 million and New York City would lose $301.7 million in state aid. Juvenile justice programs and health services would see their funding reduced.

"This budget lives within the stringent spending cap that I have proposed," Paterson wrote in a letter to residents.

New York must take steps to balance the budget or it won't be able to pay its bills, said Robert Ward, director of fiscal studies at the Rockefeller Institute of Government. He is not concerned about the extent of the trims.

"In the overall scheme of things, most of these cuts are pretty modest," Ward said. The reduction in school aid "will have some impact, but it's not going to be as devastating as some may argue."

Not all agencies, however, will face cuts. The budget would increase the state subsidy for the highway and bridge trust fund by $7 billion over two years. And Albany would pump millions into economic development initiatives.

A year of cuts and tax hikes

Like its peers, New York has been implemented harsh cuts over the past year. The state struggled with a $20 billion deficit last April and another mid-year gap of $3.2 billion.

To close the fiscal 2010 deficit, officials slashed services for senior citizens, eliminated funding for math and science summer programs, reduced funding for arts organizations and public libraries, and limited rural rental subsidies.

The state also increased a wide range of taxes and fees, including levies on high-income earners, cigarettes, alcohol and car rentals, as well as motor vehicle registration and civil service licensing exam charges.

Then, in early December, the state slashed assistance to localities by 12.5%, saving $550 million, and reduced each state agency's budget by 11% for a savings of $484 million, among other moves.